Governance Trends & Issues Around the World

This month, CMC Today went out to one of our leading CMC practitioners in the realm of Governance Consulting. (We did try to find CMC colleagues in Asia, Australia and Europe to engage their perspectives on the various trends, challenges and issues they see their clients wrestling with in 2017. In the end the following came out of dialogue between Lyn and Doug.

CMC TodayQ1- Despite the fact that there are common good governance principles; governance application is different in For-profits vs NFP’s, vs Gov’t agencies, vs Professional bodies, vs Trade assoc., etc. What do you see as some of the big differences in governance focus in these sectors?

LM – The overwhelming challenge affecting all sectors at the moment is “disruption” due to changing and shrinking economies, and digital disruption in particular. Also, generational shift – in Directors of Boards but particularly in management and now senior management, even customer generational changeover. This then creates the different challenges faced by Boards in the different sectors.

Government agencies & funded bodies - they are fulfilling a mandate set by government – health care, social services, school boards, etc. – and trying to address changing needs with decreasing funding. New demands for governance include:

Showing clear impact in the community/society for the resources invested

Fair and Transparent use of taxpayer resources

Meaningful stakeholder and community engagement to discuss priorities and focus

These organizations & their Boards have a very challenging environment, often addressing legacy structures and expectations vs. current/shifting needs. As they move further into that ‘squeeze’, they must clearly define (with Management) the “Performance Corridor” and ensure the community understands the values basis for making decisions regarding priorities and focus for money. Then ensure communications and oversight of Management to really “hit that mark”.

This requires fairly sophisticated governance practices such as systems/network thinking & visualization; openness to dialogue and engagement, multi-dimensional problem-solving and priority-weighting; and ability to understand and think forward the various ramifications and impact of decisions. Really critical challenges come around what these organizations will stop doing in order to be able to fund different/new initiatives!

Regulatory Bodies – which can include quasi-judicial panels, resource boards, professional practice and/or operational review bodies of environmental, transportation, safety/security functions, internet/broadcasting and more – are facing disruption too! These Boards must address how traditional standards and even concepts of care/service provision get redefined by changing technology and citizen/client interfaces. How does this marketplace/community shifts affect:

Blurring of lines of authority or control points

Keeping up with technologies – when to disengage from old tech practices/std and shift/update to new tech impact and expectations?

Inter-jurisdictional and inter-professional collaboration

Training & knowledge standards and expectations

“public protection” of the workplace or the client or marketplace or environment – some of these are being pulled away because of costs, and shift to self-monitoring/reporting – and what new systems/communication/monitoring design is required

Increased expectations for transparency means Board members of these organizations are increasingly having their decisions scrutinized and second-guessed by public or interest groups. Are the decisions “fair”? were the processes fair or appropriate?

Adopting a more “meta” role – oversight or creating the “framework” for community oversight – not unlike “executive limitations” for a CEO, but on a societal scale!

This means these Boards must find the “right” talent to recruit to the Board, that can work at this level, again can systems/network think and deal effectively with complexity and ambiguity.

Associations – which include local to large national & international groups around common interests such as sport, health, youth, international aid, community improvement, special interest groups, and more – are all seeing major effects of digital displacement. “Association” by definition, can actually be virtual now rather than physical, does not have to be local and can thus spread across geographical, socio-economic, cultural, language and other boundaries.

These organizations and their Boards are having to re-define their very existence!

Rethinking “affiliation” – both those who are “in the tent” and those who are “outside the tent”. Why do we want to get together or share? Just what IS our common interest?

What is membership? (Our classic approach to membership is at least 2 generations old!)

How do we sustain the organization moving forward – what do we “do”, priorities, service imperatives, “success”…

How do we provide value for fees, or should we be moving into social enterprise?

How do we deal with legacy structure, staff, infrastructure, old technology vs new demands and expectations?

As an example, trade associations have classically seen their members’ dues paid by their companies. Often now the companies are pulling back, and more individuals are having to pay their own dues, some are refusing to pay. So we see membership shrinkage; and again a shifting focus on what members want from their association together.

For-Profit companies – the focus has shifted over the past few years to now a solid focus on Risk, Risk, Risk! This includes in particular, Enterprise Risk Management (ERM) processes and mitigation. Unfortunately, if not careful and again multi-dimensional, the risk focus has the unintended impact of squashing innovation and new product/service value creation.
Other elements of governance attention in the for-profit sector include:

“Unlocking Value” – how do we take our assets and what do we do with them to truly unlock additional or new “value”?

Shareholder Imperative – shareholders want return on their investments! Shareholder activism is on the rise, moreso than ever before – looking for answerability on ethical practices, environmental impact, executive compensation, etc., but most particularly on sustainable & appropriate ROI. (Remember, most shareholders today are you and me, our pension funds and retirement investments!)

As you can see, the demands on Directors of Boards, senior executives and their governance mechanisms/practices have become more complex, heady and sophisticated than ever!

TM - The fundamental success in the application of Governance is that all parties involved understand the basic principles of governance. One of the fundamental rules of Governance is a country's Government (a country's constitution - or founding credo) – this is referred to as the 'rule of Law' – it defines how the people inside of a sovereign powers border's want to be treated, live and do business. Underneath this, comes all the other rules/Laws of Governance.

What we are talking about in this article however is Corporate Governance, how an entity should make decisions, how it reports to its stakeholders and how stakeholders should behave.

The first thing to remember is there is no 'one size fits all' model of Governance. Each entity and industry is unique and needs a model that suits the size and complexity of its operations, revenue and reporting requirements.

That of course doesn't mean there isn't a best practice model available for each level of size and complexity; however an organisation needs to assess that and determine that level themselves, subject to their legislative level of reporting requirements with in their country or in the case of an international entity the international bodies it reports to, its legal entity and how the members choose to be governed themselves.

CMC Today Q2 – What dimension(s) of governance contributes most to Board dysfunction in your observations?

LM – well, in fact I see 3 reasons for dysfunction quite often:

The wrong people being on the Board (composition) – not competent or experienced enough to really contribute, or as identified above, unable to systems/network think through complexity.

Poor articulation or understanding of the role of the Board (vs Management). I.e. either getting too operational and doing the work of management; or staying too far back from the issues and challenges of the organization and being led by the CEO.

Of course, “the perfect storm” is to or more of these conditions at the same time!

But Doug, you see a lot of dysfunction on Boards too; how would you answer this question?

DM – To me, I have to say I am constantly surprised at how “human dynamics” can make or break a board. I am amazed how the change of even two individuals in a Board can result in the Board becoming more effective and re-energized – or move from being quite capable to becoming dysfunctional almost overnight. Of course the real elements behind this are things like:

individual ego’s that are out-of-control,

inability to respectfully engage in dialogue and exploration of alternative ideas,

poor interpersonal communications and decision-making,

distraction from exploring into the future and thinking generatively together about the major issues, trends, dynamics likely to affect the organization,

not getting out-in-front of Management.

TM - I have served on many Boards and in my opinion dysfunctional Boards come from one or more of four key areas

Lack of clear and agreed vision/objectives of an organisation – having a clear understanding of an organisations vision, goals and objectives are crucial to all having a common agreement on how the future looks. Consensus in not required however having a good Chair who can flesh out all Board members’ opinions and have them heard and respected before a Board decisions is made helps to provide sound leadership through governance. The Chair needs to be the Governance Champion at ALL levels.

Board/Director Experience – Board members need to be experienced in corporate governance, show a commitment as to the immediate past and future direction of a performing Board on their election and to be ready to contribute. Inexperienced, inactive or ineffective Board members can cost an organisation considerable time and effort to resolve. Very similar to what Lyn mentioned above.

Size and complexity mismatch – Governance should grow with an organisation’s size and complexity. There is no sense having a governance model that is too large and cumbersome which discourages decision making ahead of reaching an organisation’s goals and objectives. Governance should serve the vision not drive it. So, when an organisation is small they have a small vision; as they grow so does their vision and need for sound, maybe different governance and decision making and delegations of authority.

Self-interest (parochial or financial or other). Like it or not, many people get involved in Board or corporate governance for their own personal reasons, some for example are philanthropic and wanting to help society in a field of interest they have; some choose a field where they might gain work or personal prestige; others use their roles inappropriately for personal gain. In many countries, the last category is illegal and the prior category is considered unethical in others.

Q3 – I know you’ve worked with Boards in various countries beyond your own, as have I. What differences of governance focus or Board priorities do you notice?

LM – In Hong Kong/China, my perception is that classic governance is just developing. Culturally, there has been a tendency towards centralized planning, control and direction-setting; so international best practice “independence” of a Board is still something that isn’t natural.
One Board in particular that I worked with, the Board members, culturally, would not challenge each other publically. One thing that we have learned about good governance is the need for Board members to challenge each other, and engage in vigorous (yet respectful) debate.

DM – Both of us have worked in places like India, Middle East, and various Asian countries. But without wanting to seem stereotypical, there are some culturally driven behaviour that we do see in Boards in these areas.

LM – Indeed. In these regions there often is a tendency for “rank” and “status” to prevail. Board members tend to defer to the Chair and/or CEO. Those with recognized expertise are given leeway to assert their areas of expertise without challenge. In some cases, elders and senior executives/officials with strong egos need to have their own rank and status recognized and accepted and not have their ideas questioned. Again, this can get in the way collaborative problem solving and vigorous engagement of all members of the Board or Council.

LM/DM – In Northern Europe and UK, there is a good grasp of policy-making at the Board level. They also tend to be adept at systems thinking. There is a preponderance of Boards to allow CEO’s and senior executives to drive organizational strategy, and focus their work on oversight and asset risk management. One thing the Boards in these regions could do more of, is engage in more generative exploration as well.

TM – In my earlier comments, I mentioned a country’s legal standing with respect to the ‘rule of law’, as well, an individual’s motives can also be influenced by a county’s culture and indeed where the average cost or standard of living falls against such measures as Maslow’s hierarchy of needs.

Some developing nation’s have greater priorities than ensuring good governance, such as safe food supply, warmth, sanitisation, safety & security, etc. Where Governance does become relevant in any country, is when individual organisations access the public purse or indeed promote themselves on stock exchanges encouraging investment from the general public or other institutions – local or international. In these situations good governance creates a standard for trust and the basis of an ‘even playing field’ for all organizations involved.

Good governance, trust and an even playing field, further encourages openness and transparency. While in some cultures, openness and transparency is a foreign concept; it has become something they must to learn in order to attract investors and regulate trade in both the global and regional markets that inevitably impact their jurisdiction.

Q4 – I believe Performance Dashboards is one of your areas of passion; tell us more about how you can add value to a Board/organization with this work?

LM – Very few Board tools need to be developed as carefully and thoughtfully as a Performance Dashboard. That said, it can also be one of the most significant and positively impactful and value add contributions a Board can make to an organization.

A Performance Dashboard can potentially be harmful to an organization as well if not fully considered. If not done carefully, it can:

skew or distort priorities and behaviour,

focus on short-term results over long-term viability

focus so much on results while allowing for sort-cuts or values breaches.

However, a well-considered dashboard can cause the Board to address:

Organizational Outcomes: really be clear in defining what Performance Success of the organization should look like, moving from here  there

Vitality & Sustainability of Org

In the process of developing the Performance Dashboard, the Board and CEO really have to engage in thorough dialogue about the “performance corridor” I mentioned earlier. There is a need to be crystal clear as to what are the core priorities of the organization today and for the next say, 5 years. And these may be very different to what they have been in the past. It is a great clarifying conversation – about what success is, and what it looks like.

It also forces the Board and CEO to really understand the difference between what is an “indicator” and what is a “measure” of success.An Indicator - If you imagine a grassy lawn; then things like dandelions or bushy grass patches are indicators that you need to cut the grass! Indicators are things you track and look for, and when they appear they cause you to take action.A Measure - If we keep the analogy going, the measure might be that the ideal grass height is 2 inches. Success, is when the grass is 2” in length. Or 2” in length for most of the time the garden is open to the public.

From a governance perspective, a Performance Scorecard is an excellent tool for transparency and accountability at every level – staff, management, Board to shareholders and funders. So, it must be well thought-through.

As an alternative to a Scorecard, the Board can focus on developing a strategic plan with clear critical success factors/ goals, and outcomes measures then monitoring progress to a plan. This is still excellence in governance practice, and hold management to account. The Board asks "so what” /now what – kinds of questions on a quarterly/annual basis; and should review every now and then whether or not they have the right outcomes measures in place.

DM – Tim please share with us some of your areas of passion in the field of governance…

TM - Once a governance model is designed for n organization, the work is not finished. The models needs to be implemented and adjusted as in practice there is invariably 10-15% of the model that needs adjustment from theory to reality.

Having a system whereby consistency of terminology and freedom of Board and Management operations exist, come from Governance processes being able to adjust the needs of balance between compliance and getting the job done.

Governance requires a continual balancing of change of needs from compliance/transparency to freedom of Board direction and operational execution of the Vision and objectives of an organisation.

Q5 – What advice would you give a young CMC who is thinking of moving into consulting in this area?

LM - This really is serious work – you can’t be a pretender.
I’d definitely say, “serve on a board yourself, first”; before trying to consult in this area. Work on and/or with a board (non-consulting role).

Next, do some study, some course work (i.e. take a reputable board governance program or certification), and do some research into leading governance practices in your jurisdiction. In Canada for example there are the various securities commissions’ standards and principles for governance, and the Canada Not-for-profit Corporations Act – both are a combination of prescriptive and principles-based documents. Other jurisdictions have things such as the Sarbanes-Oxley Act, the UK Cadbury Commission Report/Governance Code/Checklist; and the OECD standards for Corporate Governance.

In the world of governance consulting there are some legal underpinnings that you need to be fluent with. Unlike some other areas of consulting, there really are some “right”/ “wrong” answers to questions you will get from Boards and Directors. You can’t fake this!

Also, the work at this level deals with strategy, performance priorities, and understanding the multi-faceted, complex environment that demands trade-offs, thinking forward implications of decisions – all things that can significantly affect an organization – both positive and negative.

This said, these are the things that make this line of consulting very rewarding work, and leaves you feeling like you are making a difference in the world!

DM – These are great closing comments Lyn, thank you very much for your insight.

Let me also add something I feel is very important. I’ve been called to testify and/or serve as an “expert witness” in some legal reviews and federal commissions on governance. One of the most interesting questions I was given, came shortly after the global debacle from sub-prime loans in the USA that rippled across the world – as Boards and pensions funds invested in complex instruments like derivatives, convertible bonds/shares, “shorting”, “hedging”, etc. At the time, not-for-profit organizations, government agencies and for-profit companies alike suffered significantly from poor investment decisions. Also, at the time, several NFP Boards and government agency Boards were trying to float the excuse that as volunteer board members they couldn’t be expected to understand such investment intricacies…
The question I was asked – very directly – was: “Is there a different standard of governance for NFP organizations, government agencies and/or for-profit companies?”

The answer is of course NO! There is only one standard for proper governance, and being a volunteer board member does not mean you get to behave any less responsibly than a board member that gets paid to be on a for-profit company board. If for example as a volunteer you are unable to understand things like derivatives, then don’t get talked into investing in them!

Similarly, there is only one standard for excellence in governance consulting. You can be no less responsible, ethical, knowledgeable and capable consulting to small, NFP boards than consulting to for-profit companies. You just have to know your stuff, and you have to do your research and due diligence about the client organization, their marketplace/community, etc. And, you should follow the CMC Code of Conduct – to avoid putting yourself in over your head consulting in an area such as this that you are not properly prepared for. Smaller organizations will be less complex of course, but their need to follow common principles and meet legal duties and responsibilities are no less important.

TM – I certainly agree with most of Lyn’s comments…definitely get onto a Board or committee as early as you possibly can, even before you start consulting. Join a suitable organisation that can assist you in understanding your jurisdictional obligations and duties as a committee member or Board member (local sporting clubs, religious institutions, charities, etc.). Use this to observe your chair carefully and learn the art of leadership from within a Board. Listen much more than you talk, there is usually a vast number of years of experience around the table and it can be a great school of learning for you.

Study your country’s constitution and the jurisdictional association or government laws on corporate governance and operations, and surround yourself with some great books on the topic. Choose some as your reference texts and others to stretch your concept of corporate governance as a living growing discipline.

DM – Thanks to you too Tim. We appreciate you sharing your insights and experience!

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